If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Shenzhen Easttop Supply Chain Management (SZSE:002889), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shenzhen Easttop Supply Chain Management:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = CN¥178m ÷ (CN¥4.7b - CN¥2.4b) (Based on the trailing twelve months to September 2023).
Thus, Shenzhen Easttop Supply Chain Management has an ROCE of 7.8%. On its own, that's a low figure but it's around the 6.8% average generated by the Logistics industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Easttop Supply Chain Management's ROCE against it's prior returns. If you'd like to look at how Shenzhen Easttop Supply Chain Management has performed in the past in other metrics, you can view this free graph of Shenzhen Easttop Supply Chain Management's past earnings, revenue and cash flow.
What Can We Tell From Shenzhen Easttop Supply Chain Management's ROCE Trend?
In terms of Shenzhen Easttop Supply Chain Management's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.8% for the last five years, and the capital employed within the business has risen 60% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On a side note, Shenzhen Easttop Supply Chain Management has done well to reduce current liabilities to 51% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.
Our Take On Shenzhen Easttop Supply Chain Management's ROCE
Long story short, while Shenzhen Easttop Supply Chain Management has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 5.5% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
While Shenzhen Easttop Supply Chain Management doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 002889 on our platform.
While Shenzhen Easttop Supply Chain Management may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.